Taxation, Pensions and Lump Sums

Taxation

If the beneficiary is 60 years of age or more, all pensions paid from a taxed source are tax-free. If the beneficiary is over 60 and retired, or is over 65 years of age, lump sums paid from a taxed source are tax-free. If the pension is not paid from a taxed source (such as certain government pensions) certain elements of the pension are taxed at a concessional rate.

If the beneficiary is between 55 and 60 years of age, a lump sum up to the amount of $150,000 is free of tax. The amount of tax payable on pensions and the remaining part of any lump sum over $150,000 depends on the amounts of the tax-free component and the taxable component, the nature of the benefit and when the contribution was made. For example, the part of a lump sum relating to contributions made before July 1983 is not taxed, whereas the part relating to contributions made later may be taxed at the person’s marginal rate less the tax offset of 15% (therefore, a person on a 31.5% marginal rate would pay 16.5%). Further details are available in Withholding Schedule 12, “Tax Table for Superannuation Lump Sums” (NAT 70981).

It is no longer possible to access the concessional and non-concessional components other than in the proportion they bear to the whole of the fund (unless the fund is split into two funds).

The amount of tax payable may also depend on the age at which the benefit is taken. If the benefit is taken before age 55, the tax rate may be higher.

The taxation of benefits can also be delayed by “rolling over” the benefit into a particular type of fund, and letting it accumulate, rather than taking the benefit as soon as it is available.

The advantage of starting to take benefits is that capital gains and income into the fund are no longer taxed.

Pensions and Lump Sums

Benefits can often be taken either as a lump sum, or as a pension. There can be taxation advantages of taking a pension for those aged less than 60, but the tax-free initial amount of $150,000 applicable to a lump sum does not apply to a pension, and this could be disadvantageous.

There has been considerable change in the types of pensions available. Until recent tax and social security changes, there were five different types of pension, which had different features relating to the now abolished reasonable benefits limit, different social security features and different payment and investment features.

From 1 July 2007, any pension is allowed that meets certain minimum standards relating to minimum annual payments (for example, the annual payment for a beneficiary aged 55–64 must be at least 4% and no more than 10% of the account balance, although certain concessions apply in the 2012-13 financial year).

From 20 September 2007, 100% of the assets of any pension are assets tested for social security purposes. It is important to obtain advice if a pension has been started before 20 September 2007. It may be worthwhile for people who have already started receiving a pension to see whether it would be worthwhile stopping the pension and commencing a new one.

For people aged over 55 and still working, there can be benefit in a “transition to retirement” pension, which allows a person to receive a superannuation pension with a 15% tax offset and still contribute to superannuation. Effectively, this could reduce the tax payable on the earnings whilst maintaining the previous gross cash income. The pension is not commutable until retirement or age 65.

It is important to take professional advice about the type of pension that you choose.